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25 October 2012

The Business Case for Muskrat Falls #nlpoli

All sorts of business people in Newfoundland and Labrador love Muskrat Falls.

Funny thing is that they don;t talk about risk, profits, cash flows, return on their investment, and other stuff you’d expect business people to talk about.

Nope. They say stuff like “We believe in good things for our province.”

Who doesn’t?

They say things like “… we believe we have the courage to harness the opportunity before us and make these things happen.”

So that started the old gears turning in your humble e-scribbler’s old noggin. What would it be like if they listened to a business pitch for Muskrat Falls just the same way that Nalcor and the provincial government is pitching Muskrat Falls?

Let’s not get distracted by alternatives and public utilities board and megawatts and all that. Let’s just talk about making the old staple product in business school: widgets. And just for the sake of convenience, let’s make the pitch to the province’s greatest living businessman, the Old Man Hisself.

You want to build a plant to manufacture widgets. You go to Danny Williams and tell him you have a great idea. Together, you can fulfill a longstanding dream of Newfoundlanders and Labradorians and overcome the horrible stain on our collective memory of the 1969 Upper Widget contract.

This project will finally break the stranglehold that Quebec has had over our efforts to export widgets to the United States. We will finally be able to achieve our collective destiny as a widget powerhouse.

We will build a plant to manufacture widgets. Officially, the plant will manufacture 824 widgets an hour. This new plant will replace another, older plant that is costly to run and uses oil for fuel. Our new plant will make widgets using a green technology.

Now, we actually only need to use this plant for a few weeks of the year because otherwise we have plenty of widgets from other green widget plants. While we don't need a new plant right away, and we might be able to find cheap widgets somewhere else, you and the world-class experts who work for you believe this is the best option.

How will you pay for this wonderful project, he asks?

Well, this is where it is really simple. We need Williams to empty his bank account of all his savings. We also need him to borrow some additional money and turn that over to help pay for the project. To keep the borrowing costs as low as possible, Danny will have to ask one of his friends to co-sign a loan for us.

Here’s the beauty part. While Danny will finance the project, it will be owned by a company that we will run on his behalf as the sole shareholder. By this time, he will probably be hunting for the phone to call his banker.

Well, it might be security to toss you from the building, but if Danny doesn't throw you out of the room at that point, just explain that he will get his money back plus more besides. That will get his attention.

You see, you just have to tell him about the revenue stream for this widget plant and the guaranteed return on his huge investment.

Danny will take delivery of 40% of the widget output each year. But here’s the beauty of it: he will pay for 100% of the plant output plus profit. Over the course of 50 years, that money from Danny's own pocket will pay him back the money he gave us, repay the other loans he took out, and also deliver a profit to you, the company that will run the plant, and the company from Nova Scotia that is a partner in the project.

He’ll probably want to know what will happen to the other 60% of the output since he is only taking delivery of 40% of the widgets.

No sweat. That Nova Scotia partner of yours will get 20% of the output.

How much will they be paying for it, he will likely ask?

They are buying a new truck to come and pick up the widgets and they are going in on another new truck with you to deliver the widgets to Danny.

He might ask you again about how much they will be paying for the widgets.

Tell him again about the truck they are buying.

If he doesn’t looked convinced, explain that they will get 20% of the widget supply for 35 years. Then tell him the best part: at the end of the 35 years you get the truck.

Sounds good so far, right?

There’s more.

These guys have a bunch of trucks that go to the United States. They’ve agreed to take widgets to the United States for you, if you sell any down there from your new plant. They have agreed to give you a good price for carrying your widgets. Oh yes, and they will have a share of our widget truck until 2081. They’ll get a piece of whatever money we make off what you will be paying us for hauling the widgets from our factory to his place.

By now he is probably wondering about the other 40% of our annual widget output. We might be able to sell them in the United States but widgets down there are way cheaper than our widgets. No problem. We can sell them our widgets for next to nothing purely for the extra cash because Danny is paying for the whole thing anyway. The widgets might also go to another business here in Newfoundland and Labrador. But, again, we can sell them way below cost because - as we told Danny – he will be paying 100% of the cost plus profit for the 40% of the widgets he can use.

And we don't even have to sell the extra widgets if we don't want to because, after all, we are going to force Danny by law to pay for the project plus profit.

For 50 years.

We have even set up the pricing so he pays back most of the cost of the plant later on. In fact he’ll still be paying for this plant after he could be getting widgets for next to nothing in 2041.

He’s just got to have the courage to harness this opportunity, see.

Finish up your pitch with a great quote from a very famous politician:

"It is time to choose our destiny. It is time to act. It is time to take our place on the world stage as a true widget warehouse."

Coming up...

August 3

This is your political life: Ross Wiseman

Finance minister Ross Wiseman is the latest provincial Conservative to announce that he won't be running in the November general election. On Monday, SRBP will take a look back at three moments in Wiseman's political career that define the man and his political legacy.

Date TBA

Lions or Jellyfish: a review

Ray Blake's new book is in the stores or available from University of Toronto Press online. Blake examines the relationship between the provincial government in St. John's and the federal government through eight episodes from Term 29, through resettlement, to hydroelectricity, to the offshore, Meech Lake, and Equalization.

Date TBA

Changing the direction. Changing the tone.

The party that forms government after the November general election will face significant challenges from its first minutes in office. One of them will be changing the relationship between the provincial government and the people of Newfoundland and Labrador. In an upcoming series of posts, SRBP will look at the challenge of managing the government's relationships with the public.